Why Chinese Investors Are So Bearish On Chinese Stocks

The Chinese stock market has been the worst major market in the world this year (see right).

Down again today, the Shanghai Composite index is trading near a four-year low.

Even though the Chinese economy has had its bumps, the growth rate continues to be staggering, and most recent economic data show growth is accelerating again.

So why have the stocks done so poorly relative to the economy?

Bank of America economist Ting Lu explains:

Why Chinese investors are bearish about A-shares?
The most asked question from global investors is why Chinese onshore A-shares did not respond to the improving fundamentals. Is this because these macro indicators have low quality and give us a wrong picture? We don’t think so. Very often the sentiment-driven A-share market is a barometer for Chinese investors’ mass psychology instead of the real economy. More specifically, domestic investors might get increasingly disappointed about prospects of future financial reforms, especially reforms on stock markets. Availability of other investment channels such as wealth management products and housing also divert demand. Heavy-handed interventions in the past year sows the seed of bear market now as about 100 IPOs have been approved but yet to be listed and 700 more are in the pipeline.

In other words, stocks aren't the economy.  It's a reflection of psychology, which is arguably the case for stocks everywhere.

Here's a 5-year look at China's Shanghai Composite courtesy of Bloomberg:



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